Veterans with schizophrenia and schizoaffective disorder experience high levels of disability and poor community outcome, and these poor functional outcomes constitute a major public health concern. The treatment of schizophrenia spectrum disorders has shifted fundamentally from a focus on symptom reduction to a focus on recovery and improving aspects of functioning. Needed improvements in community outcome for patients with these disorders will not occur simply through better control of clinical symptoms. Instead, it is necessary to find new treatments that address the key determinants of poor functional outcome, including social cognition. Both basic (non-social) cognition and social cognition are considered key determinants of functional outcome for schizophrenia and schizoaffective disorder. Basic cognition includes the domains of: learning and memory, vigilance / attention, speed of processing, reasoning and problem solving, and working memory. Social cognition generally refers to mental operations that underlie social interactions, including perceiving, interpreting, managing, and generating responses to socially relevant stimuli, including the intentions and behaviors of others. As part of our previous Merit grant, we have developed a training program for social cognition and are in the process of validating it. Initial results suggest that the program improves performance on measures of social cognition and functional capacity. In this study, we will evaluate whether adding an in vivo component (training activities that occur in the community) to the current social cognition intervention facilitates generalization of training effects to community outcome and subjective satisfaction. Outcome measures of social cognition and functional capacity will be examined during the 12 week training program, and durability of benefits will be assessed at a 3-month follow up. Generalization to community functioning and subjective satisfaction will be assessed at the end of training and at the 3-month follow up. We will enroll 105 patients across the 5 years of the study with random assignment to training group (social cognition intervention with in vivo exercises, social cognition intervention without in vivo exercises and control). Subjects will receive assessments at baseline, 6 weeks (mid-point), completion of training (12 weeks), and the 3-month follow up. Meaningful steps toward achieving improved functional outcome in schizophrenia and schizoaffective disorder require understanding how generalization of training programs can be enhanced. The ultimate goal of this research program is to improve community outcome for veterans with psychotic disorders by addressing the determinants of functional outcome.